Avoiding the Middle Avoiding the Middle Income Trap:Income Trap:

Renovating Industrial Policy Renovating Industrial Policy Formulation in VietnamFormulation in Vietnam

Kenichi Ohno (VDF/GRIPS)Kenichi Ohno (VDF/GRIPS)

Revised August 11, 2009Revised August 11, 2009

Main Argument

1. Vietnam’s challenge: Creating internal value and avoiding the middle income trap

2. Vietnam must renovate: - Policy content - Policy structure - Policy making organization3. Where to begin? - Draft a policy renovation plan - Establish a technocrat group - Mobilize foreign partners strategically

Vietnam’s New Era

Vietnam is entering a new era where productivity breakthrough and value creation are needed.

Opening up and receiving FDI can attain middle income ($1,000+), but higher income ($10,000+) requires good policy and private dynamism.

The question is how to level up skill and technology embodied in human capital. Money and machines are not the problem.

Different Speeds of Catching Up

0%

20%

40%

60%

80%

100%

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Japan

Taiwan

S. Korea

Malaysia

Thailand

Indonesia

Philippines

Vietnam

Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Sources: Angus Maddison, The World Economy: A Millennium Perspective, OECD Development Centre, 2001; the Central Bank of the Republic of China; and IMF International Financial Statistics (for updating 1998-2006).

STAGE ONE

Simple manufacturing under foreign

guidance

STAGE TWO

Have supporting

industries, but still under

foreign guidance

STAGE THREE

Management & technology

mastered, can produce high quality goods

STAGE FOUR

Full capability in innovation and product

design as global leader

Vietnam

Thailand, Malaysia

Korea, Taiwan

Japan, US, EU

Agglomeration (acceleration of

FDI)

Creativity

Glass ceiling for ASEAN countries(Middle Income Trap)

Stages of Catching-up Industrialization

Initial FDI absorption

Internalizing parts and

components

Technology absorption

Internalizing skills and

technology

Internalizing innovation

STAGE ZERO

Monoculture, subsistence

agriculture, aid dependency

Pre- industrialization

Arrival of manufacturing

FDI

Poor countries in Africa

Lessons fromThailand and Malaysia

（ Success ） Impressive industrialization and growth led by FDI and reasonable policy

（ Failure ） Domestic private-sector capability is still weak after many decades

Foreign dependency—inability to send foreign managers home

Value and capability are not internalized—middle income trap

Risk of wage pressure and FDI shifting to China/India/Vietnam

Vietnam’s Challenge

AFTA, WTO, FTAs - large inflows of ASEAN products (esp. Japanese brands) may destroy VN’s industrial base.

The risk of losing manufacturing base and keeping only sales agents (“hollowing-out”).

Vietnam’s wage becoming too high for labor-intensive industries, but technology too low for knowledge-intensive industries.

Vietnam needs a strategic partner to greatly increase internal value in manufacturing.

Vietnam’s Changing Sources of Growth

Doimoi to mid 1990s—liberalization effect Mid 1990s to now—externally driven

growth with large inflows of investment, capital and aid

From now—creation of internal value!

- 2- 101234567

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

ICOR

TFP change (%)

Policy Content and Structure

Successful industrial policy making in East Asia has been characterized by

Goal orientation: Vision Strategies Action plans Mechanism to ensure implementation

- Vietnam has a vision (Industrialization and Modernization 2020) but it is not backed by concrete strategies or action plans.- Only small part of approved policies and master plans are implemented in Vietnam.

Description Examples

Vision -Slogan-Short and Vague

-Vision 2020 (Malaysia)-Detroit of Asia (Thailand)-Industrialization & Modernization (Vietnam)

Strategy -Document specifying goals, roadmaps, policy measures-Scope & detail depend on each case

-Industrial Master Plan (Malay.)-Automotive Master Plan Main Text (Thailand)-e-Japan Strategy-Industrial Cluster Plan (Japan)

Action plan

-Document, action matrix, formal or informal mechanism, or ongoing process

-Automotive Master Plan Action Tables (Thailand)-Vietnam-Japan Joint Initiative-Triangle of Hope Project (Zambia)

Review & Adjustment

-Numerical monitoring, document report, organizational review, or no formal review

-Interim & final review by joint committee (VJJI, ToH Zambia)-Industry specific committees (Thailand)

<Malaysia>

Vision 2020 IMP OPP/Malaysia Plan Budget“Become fully (15 yrs) (5-10 yrs) (annual)developed” 1991

<Thailand under Thaksin> (2001-06)

PM’s vision Auto Master Plan Action Plan MatrixBecome Business-MOI-experts agree on“Detroit of Asia” targets for car/motorcycle production & export

<Ethiopia>

ADLI Ind.Dev.Strategy M/Ps Exp.St.Committee1994 2003:policy principles Leather/garment/flower/ food processing

<Vietnam> Goal 2020 Overall industrial M/P? Action Plan?10YS/5YP (Does not exist) (Does not exist)

Strategy OutputKey success

indicatorMain

resp. org.Cooperati

ve org.

1. Number of trained persons

TAI

3.1 Provide Systematic training to the industry from workers to management level

2. Number of companies sending employees for training

3.2 Skill training 3. Increased income of trained persons

3.3 Provide training to engineers in the field of advanced engineering and specialized technology

4. Cost reduction and profitability

OIB/TAIA/TAPMA/FTI

Action Plan

3. Automotive training center project

Standardized automotive training center

1.2 Automotive Human Resource Development

Sample Format of Thai Automotive Master Plan

Source: Executive Summary (English), Master Plan for Thai Automotive Industry 2002-2006, page 10.

Vietnam’s Industrial Vision under Global and Regional Integration

Global re-location of manufacturing sites by MNCs Only attractive production locations can survive and prosper

Policy must progress: 1/ Basic: regulatory efficiency 2/ Intermediate: Responsiveness to business needs 3/ Advanced: pro-active creation of attractive location

Vietnam’s strengths are good geographical location and hardworking people, but these are not fully utilized.

Policy Must Create Three Pillars of Competitiveness

To create domestic value and take part in global value chain effectively, VN needs:

Competitive industrial human resources (management, skill, technology)

Supporting industries and supporting services Logistics (efficient transportation)

These must be achieved with concrete timetables and action plans.

Example: Supporting Industry Action Plan Matrix (Proposal)

Japan proposed this matrix to MOIT/MPI for comment and discussion (June 2009):

STF1: Legal and policy frameworkSTF2: Capacity building & human resourceSTF3: FinanceSTF4: FDI marketingSTF5: FDI-local business linkage

It is hoped that A/P will be finalized and put into implementation by Sep. or Oct. 2009.

Supporting Industry Action Plan(Proposed Matrix for STF1)

Time Frame

Vietnam’s action Resp. bodies

Japan’s assistance

Resp. bodies

Short: By mid 2010

1. SME survey2. Priority sector list3. Set up inter-ministerial system4. Create excellent company prizes5. 5YP 2011-2015

MPIMOITMOIT

VCCI

MPI

1. TA, finance2. FDI survey3. Expert & information4. Japanese experience5. Expert

METI,JICAMETI,JBAMETI,JICA

JP Gov’t

METI,JICA

Medium: End 2011

1. Prepare legal framework

MPI/ASMED

1. Expert METI,JICA

Long: (2015?)

1. Revise SI M/P and A/P as needed

MPIetc.

1. Provide information

JP Gov’t

SEDS, SEDP(General directions)

Overall Industrial Master Plan(Goals, principles, priority

sectors, gov’t role, policy tools,policy making organization, etc)

Key industry master plans (10 or less) Regional development plans (3 or 4)

Proposed Structure of Industrial Policy Documents

Sectoral Regional

Policy Making Organization

For continued industrialization, Vietnam needs a fundamental reform in policy formulation. Minor repairs of current system are not enough.

Government trap – low efficiency, low morale, low salary brain drain from the public sector low-quality policies

Strong political will and risk-taking at the top level (Party, Prime Minister) is needed to initiate such reform.

Key Issues in Policy Making Organization

Dynamism of leadership – political will, economic literacy, effective use of technocrats and committees

Creation of focal point in policy making - some organization must take lead and responsibility

Ensuring implementation Public Private Partnership (effective

cooperation with businesses) Inter-ministerial coordination

Vietnam: Traditional M/P Drafting Process

Prime Ministe

r

Minister DraftingTeam

MPI & otherMinistries

Inter-ministerial review

Internal review

Order

SubmitReview for approval

Submit

Business Community

Internationalexperts

Technical assistance(sometimes)

No permanent channel for continuous policy dialogue

(case-by-case, temporary, ad hoc)

Appeal letter to Prime Minister when problems arise

Contact Ministry when necessary

Interviews, symposiums (sometimes)

Government

MPI & otherMinistries

Data

My Recommendation for Vietnam

- Elite technocrat group under strong leadership of Prime Minister

- Choose young, well educated officials & experts

- Streamline policy authority and procedure

Prime Minister

Technocrat Group(Policy Maker)

Direction, full authority for policy making

Faithful execution and

reporting

Policy, guidance and monitoring

Faithful execution

and reporting

Ministries (Policy Implementers)

ExpertsDonors

Korea – Econ. Planning BoardMalaysia – Econ. Planning UnitThailand – NESDBTaiwan – Kuomintang ElitesIndonesia – “Berkeley Mafia”Chile – “Chicago Boys”So why not Vietnam also?

Technocrat Group as the Brain of Government

Work directly under Top Leader to concretize his vision.

Create key policies including Overall Industrial Master Plan.

Guide and coordinate ministries for implementing policies.

Invite businesses, academics, foreign experts and donors for cooperation.

Emphasize economic logic; counter-balance against interest groups and rent seekers.

Organizational leadership

No single super-ministry

Govt. formulating MLT economic and physical plans via. deliberation councils

MITI serving as super-ministry for industrial policy

PrimeMinister

MITIMOFEcon. PlanningAgency, LandAgency, etc.

PM’s Office

- MLT Economic Plans- Comprehensive National Development Plans (physical planning)

DeliberationCouncils

DeliberationCouncils

- Industrial vision- Industry-specific policies- Coordination & support to business activities (e.g., finance, technology)

Participation fromofficials, business,academia, media,labor, consumers.

Japan (late 50s-70s): Development and Industrial Vision Formulation

Direct presidential control over economic policies

EPB as super-ministry

Research institute (KDI, etc.), providing analysis for MLT economic policies

Govt.-business: very close & cooperative relations

Performance-based rewards & penalties

(Blue House) Economic

Secretariats

President

FinanceBusiness

EPBDeputy PM

KDI

MTI

Ministries/Agencies

South Korea (60s-70s): Development Vision and Govt.-Business Partnerships

Five-year plan Economic Minister’sCouncil

State Council

Chaired by Deputy PM

Govt.-BusinessMeetings:

- Export promotion- Economic briefs- HCI drive, etc.

- Development planning- Public investment planning- Budget- Monitoring- Aid management

MOF

PMDeputy PM

EPU(planning)

ICU(monitoring)

MITI

Industry Coordination Council (ICC)

Industry Policy and IncentiveCommittee (IPIC)

Industry Cluster Working Groups (18 CWGs)

Malaysociety

Chinesesociety

Indiansociety

Chambers of Commerce

Source: Adapted from Takashi Torii, “Mahathir’s Developmentalism and Implementation Mechanism:Malaysia Incorporated Policy and BCIC,” ch.4, Higashi (2000), pp. 166, Figure 2.

Budgetdialogue

Annualdialogue

CentralBank

Industrygroups

Individual firms

PM’s Dept.Malaysia: Mechanismsfor Industrial Policy Coordination (1991-)

Political Parties

NPC NEAC

Chaired by MOTI Minister, Govt & business.

Govt. only (8 ministries/agencies)

Govt.& business

Vision 2020Malaysia Plan (Five-Year DP)

IMP2

Prime MinisterCabinet

NESDB

JPPCC

Financial Sector Reform

Industrial Restructuring

Social Infrastructure

Others

National Committee on Industrial Development

Sub-committee on National Industrial Restructuring

Economic Cabinet Meeting

InstitutesTextile, Food, Automobile, Iron & Steel, SME,

Productivity, Mgt. System Certificate, etc.

Source: Shigeki Higashi “Industry: Business and Government in a Changing Economic Structure”ch.3, Suehiro & Higashi (2000), p.166. Figure 3

Public-Private Partnership for Industrial Restructuring(Thailand after 1997)

Line Ministries Thai EXIM BankIFCTSICGC

Federation of Thai IndustriesIndustry AssociationsChamber of Commerce

CommercialBanks

Examine & discuss basicpolicy & direction

Examine & discuss detailedmeasures & actions

Information sharing; Specific MP formulation, etc.

Chaired by Deputy PM

Chaired by Deputy Minister, MOI

Operated jointly by public ＆ privatesectors

Govt.-business consultation body, established in the early 80s.

How to Begin Policy Renovation

Set up a task force to study international experiences and draft a policy renovation plan. Get international help if necessary.

Debate the plan for PM’s approval. Establish a technocrat group. This group

must be really excellent and dynamic. Let technocrat group do the following: - Implement the policy renovation plan.

- Draft the overall industrial master plan to concretize the 2020 vision.- Cooperate strategically with foreigners.

Strategic Cooperation with Foreign Partners

After VN’s industrial vision and roadmap are clarified, let FDI & ODA support them. Do not randomly accept industrial aid.

In manufacturing, Japan wants to do the following cooperation:

- Supporting industry action plan (since 2008) - Industrial Corridor Initiative in Northern Vietnam

(since early 2009)

Example: Industrial Corridor Initiative (PPP Policy) by METI & ERIA

METI, Trade & Econ. Coop. BureauEcon. Research Institute for ASEAN & E. Asia (ERIA)

“Asia PPP Policy Report” (April 2009)- Regional development with core infrastructure- PPP policy package (M/P drafting, finance, TA)- Expanded and more flexible use of ODA- Policy dialogue for better institutional framework- Mobilization of Japanese firms

Implementation (beginning)- PPP Task Force, headed by Prof. Urata- Industrial Corridor Group, headed by me – VN & India as

initial cases- Global Finance Group